Report No. 61
3.11. Suggestions noted in earlier Report.-
As already stated,1 the earlier Report of the Law Commission was confined to a narrow legal question. Suggestions that were received by the earlier Commission2, however, indicate that several alternatives are open in this context.
(i) The proposition laid down in Khosla's case may be left as it is3;
(ii) The proposition laid down in Khosla's case may be codified4;
(iii) That proposition may not only be maintained, but may also be extended in its scope5;
(iv) That proposition may be abrogated, so as to allow the States to levy sales tax on such transaction6.
1. Para. 3.10, supra.
2. 30th Report, paras. 132 to 139.
3. c f. 30th Report, para. 133.
4. Cf. 30th Report, para. 134.
5. c f. 30th Report, para. 136.
6. c f. 33th Report, para. 135.
3.11A. Entries in the Constitution relating to international relations.-
The choice is, thus fairly wide; and a decision in the matter necessarily requires an examination of matter of constitutional' policy. The reason why sales in the course of import (or export) are taken out of the domain of taxation by States is well known. Matters affecting international trade were intended to be kept exclusively within the competence of the Union, and the Constitution-makers were anxious to see that the legislative power of the State was not exercised in a manner which would impair the efficient performance of the responsibility of the Centre in the field of international relations.
This is evident not only from the entries in Union List relating to international affairs in general, but also from the entries relating to international trade in particular. For example, trade and commerce with foreign countries, and imports and exports across customs frontiers, are dealt with by a specific entry in the Union List-Union List, Entry 41. Duties of customs, including export duties, fall within the exclusive competence of the Union-Union List, Entry 83. The general principles laid down in the Constitution, Article 246(1), about the paramountcy of entries in the Union List need not be elaborated here.
For abundant caution, some of the entries in the State List expressly lay down that the power thereunder is to be subject to the legislative power of the Union under a specific entry. For example, see State List, entries 11, 13, 22, 24, 32, 33, 54, 63 etc. In fact, the entry relating to the taxing power of the State in relation to sales or purchase of goods (State List, entry 54) provides that the power is subject to Union List, Entry 92A. (Entry 92A-Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or Commerce.
It is this anxiety of the Constitution-makers to preserve international trade from the taxing power of the States which is reflected in Article 286(1)(b), which prohibits the imposition, by a law of a State, of a tax on the sale or purchase of goods where such sale or purchase takes place, in the course of the import of the goods into, or export of the goods out of, the territory of India.
3.12. We may now consider whether the preservation of international trade from taxation by the States justifies the imposition of a prohibition against the levy of tax by the States on transactions of the nature which figured in Khosla's case. The question to be considered is, when there is a transaction in which there are two sales, namely, (i) a sale by a foreign manufacturer, dealer or other foreign trader to an Indian importer, and (ii) a sale by the Indian importer to the first purchaser in India should the second sale be regarded as deserving of exemption from state taxation, even in the special circumstances that were present in Khosla's case?